Insurance 2020: Impact of Brexit on the Luxembourg insurance sector

The UK’s decision to leave the European Union led insurance companies established in the UK to consider other options, such as relocating their place of business to continental Europe. In the midst of this contingency planning, Luxembourg emerged as a popular jurisdiction. The stability of its government, its triple A rating, the force and size of its financial sectors and the responsiveness of a dedicated supervisory authority for the insurance sector (the Commissariat aux Assurances, “CAA”), all played favourably for Luxembourg. As a result, at least twelve insurance companies located in the UK took the decision to establish an entity in Luxembourg. Big names in the insurance sector, such as AIG, Hiscox, FM Global and Scottish Widows have all set up insurance companies in Luxembourg.

The arrival of these companies in Luxembourg has increased the non-life insurance sector’s revenues and created demand for qualified employees, and employment in the Luxembourg insurance sector has increased significantly over the past two years. The non-life insurance sector increased by 203.49% over the first nine months of 2019, in terms of premiums paid, and balances have also generally increased. Although, the life insurance sector does still dominate the insurance market in Luxembourg.

The reorganisation of UK insurance groups at a cross-border level has triggered legal and operational questions, such as compliance with Luxembourg outsourcing and professional secrecy requirements. Luxembourg regulations provide for a strict obligation of professional secrecy and violations are subject to criminal sanctions. Insurance undertakings may not disclose client-related information to third parties, including entities belonging to the same group.  There are, however, limited exceptions to this principle, in particular, for outsourcing arrangements, provided certain conditions are complied with (e.g. obtaining the client’s consent to the communication of information to third parties).

In addition to taking local legal advice, UK insurers were invited to become members of the professional association of Luxembourg insurers and reinsurers (“ACA”). Membership of the ACA has enabled UK insurers to share experiences with other members and participate in the development of common industry positions taking into account the views of the ACA’s diverse membership.

The supervisory authorities in both the financial and the insurance sectors have been vigorously ensuring compliance with anti-money laundering and terrorist financing (“AML-CTF”) regulations. In this respect, the CAA has recently published various regulations and circular letters on AML-CTF matters and notably a circular letter aiming to implement a new harmonised AML-CTF risk assessment questionnaire for life insurance undertakings. Pursuant to this circular letter, life insurance undertakings are required to grant an AML-CTF risk score to agreements they enter into. The standard questionnaire should be completed for each new subscription and for each movement or significant amendment to an existing agreement. By collecting data from the relevant insurance undertakings, the CAA is able to carry out an assessment of the threats to and vulnerabilities in AML-CTF matters in the insurance sector as a whole. 

The CAA has also carried out a large-scale review of compliance by way of on-site inspections and reporting requirements over the past two years. This focus on AML-CTF matters is partly explained by the fact that AML-CTF is currently a hot topic in Luxembourg because a mutual evaluation by the Financial Action Task Force is expected in 2020. The latest sanctions administered by the CAA relate to violations of AML-CTF obligations. However, unlike the sanctions administered by the Commission de Surveillance du Secteur Financier, the Luxembourg financial supervisory authority, the fines levied by the CAA for violations of AML-CTF obligations remain rather low. The amounts may however increase in the future due to changes to the AML-CTF framework as a consequence of the implementation of the fourth AML Directive. In light of this, existing and new players should make sure they comply with their AML-CTF obligations and bear in mind the specific requirements of Luxembourg legislation and regulation.

Finally, the CAA informed EIOPA in July 2019 that it will fully implement EIOPA’s “Recommendations for the insurance sector in light of the United Kingdom withdrawing from the European Union” and therefore contribute to convergence and consistent supervisory approaches in the treatment of UK insurance undertakings at EU level.   

Insurance undertakings established in the UK should be able to rely on their existing passporting rights until the end of 2020 under the current terms of the withdrawal agreement to be entered into between the UK and the EU.  The position after that is still to be determined.